The Black Swan

[chin]

The Black Swan, The Impact of the Highly Improbable
by Nassim Nicholas Taleb

This is not an easy book to read, for me at least. It's not the mathematical or logical concept that's hard to comprehend. Just that sometimes the author's langugare is confusing to me, especially when the philosopher side of him was speaking.

[chin]

P.85

Intellectual, scientific, and artistic activities belong to the province of Extremeistan, where there is a severe concentration of success, with a small number of winners claiming a large share of the pot. This seems to apply to all professional activities I find nondull and "interesting".

Acknowledging the role of this concentration of success, and acting accordingly, causes us to be punished twice: we live in a society where the reward mechanism is based on the illusion of the regular; our hormonal reward system also needs tangible and steady results. It too thinks that the world is steady and well behaved - it falls for the confirmation error.

Many things came to my mind when I read the above.

First and foremost, Project YB. Are we a fat tail, hopefully on the right end? Or are we trying to make a normal distribution out of a large number of potentially fat tail events? In one interview, Alan Woods claimed that his racing venture's return is much less of a gamble than his financial market investments.

These two paragraphs also reminded me my friend who decided NOT to quit his job to be my partner in my first company. He was just acting according to his hormon, according to Taleb.

[chin]

P.143

I recall visiting a friend at a New York investment bank and seeing a frenetic hotshot "master of the universe" type walking around with a set of wireless headphones wrapped around his ears and a microphone jutting out of the right side that prevented me from focusing on his lips during my twenty-second conversation with him. I asked my friend the purpose of that contraption. "He likes to keep in touch with London," I was told. Whe you are employed, hence dependent on other people's judgment, looking busy can help you claim responsibility for the results in a random environment. The appearance of busyness reinforces the perceptions of causality, of the link between results and one's role in them.

I happened to think that people who are always busy with their PDA, email, mobile phones are either:
- try to feel/look/sound important, and/or
- not working efficiently, and/or
- lack of facility for internal reflection.

Back to the book. The above quote was just an illustration of Taleb's point that more information not necessarily led to betting decision (or prediction, for the purpose of that particular chapter in the book.) That more information many time only reinforce decision/judgement that people already made before the arrival of the additional information.

In ther words, people still choose to see what they wanted to see, to believe what they wanted to believe.

Not that this is new. Just another reminder.

[chin]

More financial market related quotes.

p.221

Trading may have princes, but nobody stays a king.

In Jul 08, my friend KL told me their have an "algorithm trading" fund who made monster return in the first year. I asked him how much capital they would bet on a single trade, the answer was something like 30-40%!!! Methink that's gambling. But then he told me that since they have returned all initial capital and more, it's acceptable!! Perhaps this is the reason princes don't stay as kings.


p.225, footnote

As if we did not have enough problems, banks are now more vulnerable to the Black Swan and the ludic fallacy than ever before with "scientists" among their staff taking care of exposures. The giant firm J.P. Morgan put the entire world at risk by intruducing in the nineties RiskMetrics, ... Likewise, the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.

Maybe the JPMorgan stuff is related to another book I read few months ago - A Demon of Our Own Design.

Anyway, I wonder if he made the warning about Fanny Mae and US banks in 07 or earlier...


p.291

I am most often irritated by those who attack the bishop but somehow fall for the securities analyst, social scientists, and phony statisticians.

In my first job as a serurities analyst, I also wondered why anyone would read my report. I was told later that fund managers would use analyst reports as CYA (cover your ass), so when a purchase gone wrong, he has a back up.

So fund manager get the analyst reports not for the investment ideas.

[chin]

Finally finish reading the book.

The many charters in the beginning are building up to the central theme that statistical method in social science, particularly in economics and finances, with the use of Gaussian normal distribution, are deceiving and giving us a false sense of certainty.

My question remains - if not Gaussian normal distribution, then what distribution? Are we betting off to work without a concrete distribution?